Class Action Bar in Franchise Agreement Precluded Class Action Certification of Lawsuit by Franchisees Against Quiznos because Class Action Bar was not Unconscionable under Colorado Law Federal Court Holds

Plaintiffs filed a class action against various Quiznos entities and others (collectively “Quiznos”) alleging defendants misled prospective franchisees; the class action complaint asserted that it was only after plaintiffs signed 30-page franchise agreements that defendants revealed the restaurant locations were “not as profitable as Quiznos had promised.” Bonanno v. The Quizno’s Franchising Co., LLC, ___ F.R.D. ___ (D.Colo. April 20, 2009) [Slip Opn., at 1-2]. According to the allegations underlying the class action, Quiznos also failed to provide plaintiffs with “any of the promised expert help,” but nonetheless demanded that they open restaurants within the one-year deadline set forth in the franchise agreements or the agreement would be terminated and Quiznos would keep the franchise fee. Id., at 2. The class action centered, then, on claims on behalf of “sold but not opened franchisees,” id. (Defendants conceded that “not every signed franchise agreement results in a functioning restaurant,” id., at 4.) Plaintiffs moved the district court to certify the litigation as a class action, id., at 3. Defendants opposed class action treatment, primarily on the ground that Section 21.4 of the franchise agreement prohibits class action lawsuits between the franchisor and the franchisee. Id., at 3. The district court held that class action waiver was enforceable and, accordingly, that class action certification was not warranted. The federal court therefore denied the motion. (We do not discuss in detail the 53-page opinion filed by the district court; it is well worth reading and it is available at the link following this article. For our purposes, the important issue is the enforceability of the class action waiver in the franchise agreement.)

Plaintiffs argued that “[t]he most significant issue…is whether, in light of the provision of the franchise agreements that purports to bar class actions, this case can be maintained as a class action in the first instance.” Bonanno, at 3. The district court held a hearing on the validity of the class action bar, and accepted supplemental briefing on the issue. Id., at 3-4. The district court’s order contains a lengthy discussion of the facts that “help elucidate the Court’s decision to enforce the class action bar.” Id., at 4. We do not summarize those facts here, see id., at 4-17, or the federal court’s summary of the standard of review, see id., at 17-19, or the court’s summary of the “history and evolution of class action litigation,” see id., at 20-25, because the district court held that the class action bar was enforceable and therefore did not address the merits of Rule 23, id., at 19.

With respect to the validity of the class action bar, the district court noted that plaintiffs’ bore the burden of establishing that the class action waiver was unenforceable. Bonanno, at 25. To meet that burden, plaintiffs argued that a class action waiver was akin to a jury trial waiver, thus shifting the burden to defendants to “show that Plaintiffs voluntarily and knowingly relinquished their ‘right’ to proceed as a class.” Id. (footnote omitted). The district court rejected this argument, explaining in part that “courts do not have discretion with respect to deciding whether or not to allow a trial by jury” but that “the history of class [action] litigation reflects that the courts, not the parties, determine whether a suit should proceed on a class basis.” Id., at 26. The court also found “little guidance” in published opinions because most class action waivers were addressed in the context of mandatory arbitration clauses, and the franchise agreements did not require the franchisees to resolve any dispute through arbitration. Id., at 27. After discussing and discarding plaintiffs’ authority, the federal court concluded that the relevant inquiry was whether the class action bar was unconscionable under Colorado law, id., at 37.

After summarizing Colorado law on unconscionability, see Bonanno, at 37-40, the federal court turned to the central issue, “is the class action bar unconscionable under Colorado law?” Plaintiffs argued the class action bar was not enforceable because “Quiznos’ sales process infected the entire franchise agreement with fraud” and because “enforcement of the class action bar is substantively unfair.” Id., at 40. The district court agreed that the fact the franchise was a form agreement presented by Quiznos on a “take-it-or-leave-it basis” weighs slightly in plaintiffs’ favor, but noted that Colorado law does not render such contracts unconscionable per se. Id. Given that plaintiffs were not coerced into entering into a franchise agreement with Quiznos – “[t]hey were free to purchase a different franchise or invest their money elsewhere without any financial repercussions to themselves or Quiznos” – the fact the contract not negotiable and that Quiznos had superior bargaining power only “cuts mildly in Plaintiffs’ favor.” Id., at 41. On the other hand, the fact plaintiffs (and other prospective franchisees) had an opportunity to review the franchise agreement “favors enforcement of the class action bar.” Id., at 42. Moreover, Quiznos provided plaintiffs with 10 days to review the franchise agreement and to “procure legal counsel” in this process, which “cuts squarely in Quiznos’ favor.” Id.

The district court additionally found other factors that weighed in favor of enforcement of the class action bar. For example, the class action bar language was in the same typeface and font as the balance of the franchise agreement, and the fact it was “towards the end of the agreement does not make it any more difficult to see or understand than a provision placed on the third or thirteenth page of the franchise agreement.” Bonanno, at 43. The class action bar also served a commercial purpose: “the fact that the class action bar discourages litigation, even if it is a somewhat nefarious goal from Plaintiffs’ perspective, does serve a commercial purpose from Quiznos’ perspective.” Id., at 44. And finally, the district court concluded that the class action bar was not substantively unconscionable because the amount at issue would not preclude individual actions to recover damages, and because under Colorado law the fact the class action bar benefited Quiznos more than the franchisee does not render it substantively unfair. See id., at 44-47. In sum, plaintiffs failed to meet their burden of establishing that the class action bar was unconscionable; accordingly, the federal court denied plaintiffs’ motion for class action certification. Id., at 52.

Michael J. Hassen's litigation practice spans almost 30 years and emphasizes general business and commercial litigation, including class action defense and unfair business practice representative actions (section 17200).

He represents lenders in all facets of lender litigation, ranging from class actions and unfair business practices based on alleged "predatory" lending and RESPA violations or alleged violations of the Fair Debt Collection Practices Act, to claims alleging elder abuse or challenging the validity or priority of liens.

Michael also has significant experience in business torts such as misappropriation of trade secrets and raiding of corporate employees, ADA claims, and all phases of commercial and real estate finance, construction finance and construction defect claims.

He is experienced in appellate matters, having had primary responsibility for preparing more than 100 appellate briefs.